The Real Truth Behind the New Jobs Numbers

Tom Essaye | Wednesday, February 8, 2012 at 7:30 am

Even though you know that trading the headlines is a sucker’s game, plenty of people who continually miss that memo wind up driving stocks up or down based on what they think the day’s headlines really mean.

The bad news isn’t just that your positions can get hurt if stocks go down but, moreover, that they can get driven up artificially based on false optimism … which can cause them to crash even harder when the real news comes out, or when the next batch of headlines isn’t as positive (even if only in perception) as the last.

The good news, however, is that you can easily become far more-informed than these trigger-happy buyers and sellers, simply by digging just a little deeper before you decide to join them in panicking and, worse, losing money. Armed with this additional information, you can make much-better decisions about what to do with your investment dollars.

Today let’s take a look at how some “real” numbers can easily be disguised by investors seeing only what they want to see (or, what is most readily available).

I’ll also help you to de-mystify one of the most-important reports that moves the U.S. markets — the Employment Situation Report — so that you’re not caught off-guard the next time this (or any other) headline comes out that only gives you part of a much-bigger story.

Lies, Damn Lies and Statistics: The Truth Behind What You See

For example, last Friday’s monthly jobs numbers — rather, the “headline numbers” — showed results that were much better-than-expected.

For the month of January, the economy added 243,000 jobs vs. expectations of 135,000. Additionally, the unemployment rate fell to 8.3% in January from 8.5% in December.

Clearly this was a good number for the economy, and it shows our employment situation nationally is improving. The stock market reacted accordingly, with the Dow rising over 150 points in trading on Friday, reaching its highest level since May 2008!

That’s great news, right? Well, that depends how accurate the data driving the markets happens to be. The “real” information is usually a little more difficult to come by, but it’s there if you know where to look.

While the headline number was strong in the unemployment report, a look behind the headline shows some reasons to think this number wasn’t quite as “good” as the market believed it to be.

When trading or investing, it’s always important to look at a move in the markets or a stock to see whether that move is appropriate given the news — this can help you figure out if stocks, or the market, are trading at a premium or a discount, which presents investment opportunities.

The employment data is important because employment leads to consumer spending, which is 70% of our overall economy. As an investor, better employment means higher stock prices.

The employment numbers are an improvement over previous figures, but this doesn’t necessarily mean the data we’ve been given are entirely accurate. Here’s what I mean …

Why You Can’t Always
Take Data at Face Value

One thing professional traders examine in the Employment Situation Report is the average hourly workweek. This number, which shows the average amount of hours worked nationally and then by industry, works as a leading indicator to employment.

The reason is simple: When business begins to pick up, managers work their current employees for longer hours rather than going out and immediately hiring new workers. Only after this new business becomes a sustained trend do managers hire new workers.

So, you would want to see that average hourly workweek number rising — and in this latest release, there was no change from December, which is a potential negative.

Here’s something else to keep in mind …

The employment situation report is a seasonally adjusted number, which means jobs are added and subtracted at different intervals of the year to account for natural fluctuations in the number. One such adjustment comes mostly during the winter months. The reason is because of typical bad winter weather.

In other words, people who are employed sometimes can’t make it to work, and as such can be counted incorrectly as temporarily unemployed. To counteract that, the average number of those people is added back into the report during the winter months.

This winter, however, the weather has been very good, and few workers have been prevented from going to work because of weather-related factors. This means these people are, in effect, being double-counted.

So, if you’re making new investments based on what you perceive to be good data, you might be in for a surprise when the adjusted numbers come out.

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Go Behind the HeadlinesFor the Real Story

When you hear people in the media and politicians discussing the unemployment rate, the number they quote is called the U-3 rate. This is a very statistically manufactured number, and only counts people who are actively looking for work, but can’t find any. If a person isn’t actively looking for work, yet still unemployed, he or she isn’t counted in this often-quoted unemployment rate.

The better number to look at is the U-6 unemployment rate. It includes, in addition to unemployed people as defined by the U-3 number, people who are underemployed (i.e., not working as much as they want to be), and people “marginally attached to the labor force” — that is, those who need/want jobs, but are so discouraged that they have quit looking.

The U-6 is a much-better indicator of “true” unemployment in this country — and while it has been improving recently, it still stands at a much-higher 15.1%.

The point of all this, other than to explain the employment number a bit, is to show that it’s important to look beyond the media-reported headline numbers, to see the if the internals of the number accurately reflect the headlines and market reaction.

What the Real Numbers Mean

The way I see it, the market’s euphoric reaction to the data on Friday may be overdone, and I believe the market may be at risk of a shorter-term decline. Employment — and, therefore, the economy — isn’t nearly as good as the headlines would lead us to believe.

Yes, things seem to be getting better, but they aren’t better yet!

This won’t be the last time the market over- or under-reacts to an economic release. But when it happens, it can present lower-risk, contrarian investment opportunities for savvy investors.

Every week, several economic reports come out that can affect your investment decisions. And if the thought of combing through all that data can be downright overwhelming, you don’t have to worry anymore — I’m here to help!

In my Million-Dollar Contrarian Portfolio service, I help my subscribers to sort through the noise as well as to choose solid investments that not only hold up well no matter what the broader markets are doing, but make gains even in spite of it.

Have a good day,

Tom

Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.

Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.

{3 comments }

jrj90620Wednesday, February 8, 2012 at 12:00 pm

You have to figure,that if govt lies about inflation,it’s likely they lie about other statistics.Best to get your info from Shadowstats,where they issue honest statistics.

FrancesWednesday, February 8, 2012 at 7:41 pm

“Why You Can’t Always
Take Data at Face Value”

Pretty much crushes your thesis…..your words…

I guess its true then…the market is rigged if it only goes up…..

ChristineMonday, February 13, 2012 at 2:42 am

There are now about 23 million unemployed Americans, some of them are currently underemployed, or having given up looking for jobs. I personally think it’s time for the president and Congress to work together with the business community. It’s time to help the private sector grow the economy and thus create millions of new working places without raising taxes or increasing the deficit. And it is really possible if the Government stops the avalanche of new regulations and ridiculous lawsuits, reforming the rulemaking process, and speeding up permitting to get projects moving faster. Find more information at: http://cashadvancesus.com/created-jobs-obama-or-apple/